Joining the Great American Manufacturing Battle

Writing in the May 2012 issue of bridges, Roger Pielke, Jr. limned the contours of "The Great American Manufacturing Battle" that's unfolding, concerning the United States' need for a comprehensive manufacturing strategy with coordinated policies to address what the Information Technology and Innovation Foundation (ITIF) calls the "4Ts" – technology, tax, trade, and talent – in order to bolster the competitiveness of US manufacturing firms and industries. Pielke sided against what he disparagingly refers to as "manufacturing romantics" and with the "manufacturing skeptics" like Christina Romer, who believe that manufacturing is no more important to the economy than massage therapy or any other sector and therefore deserves no special policy emphasis.

In so doing, Pielke channels the conventional neoclassical economic wisdom that "what a country makes doesn't matter," a viewpoint memorably captured by Michael Boskin (head of former President George H. W. Bush'sCouncil of Economic Advisors) in his famous quip: "Potato chips, computer chips, what's the difference? $100 of one or $100 of the other is still $100." But there is a difference, and it is profound. First, many manufacturing industries such as those making semiconductor microprocessors (computer chips), experience very rapid growth and reductions in cost, spark the development of related industries, and increase the productivity of all other sectors of the economy. In essence, spillover effects from the sale of computer chips make potato chip manufacturers more efficient; but the converse is not true. Second, jobs producing computer chips require a higher skill level and thus pay more than jobs producing potato chips. And indeed, as ITIF explains in The Case for a National Manufacturing Strategy, manufacturing remains a key source of jobs that pay well – 21 percent more than the average hourly compensation in private-sector service industries – as well as have much larger employment multiplier effects, with each manufacturing job supporting as many as 2.9 other jobs across the economy.1 Third, manufacturing industries are a vital source of innovation and R&D in the US economy, with the manufacturing sector accounting for 72 percent of all private-sector R&D spending and employing 63 percent of domestic scientists and engineers; furthermore, US manufacturing firms demonstrate almost three times the innovation rate of US service firms.2 In other words, if we lose manufacturing, we lose more than just jobs. We lose know-how, creative capacity, and innovation. Put simply, manufacturing distinctively engenders economies of scale, leading to lower prices, lower inflation, higher productivity, and thus greater wealth creation for the whole economy. Manufacturing is also vital to USnational security and defense, a concern laid bare by a recent report highlighting the infiltration of counterfeit electronic parts into the US defense supply chain.

Yet the central reason why manufacturing matters is that it is a key enabler of traded-sector strength. In a globalized economy, a vibrant national economy is impossible without globally competitive traded sectors and enterprises – those that compete in international marketplaces and whose output is sold, at least in part, to nonresidents of the nation. And manufacturing, as the largest traded sector of the United States economy now and for the foreseeable future, will be indispensable if the United States is to balance its terms of trade (the country accrued an astounding $5.5 trillion foreign trade deficit in the 2000s); manufacturing accounts for 86 percent of US goods exports and 60 percent of total USexports.3 By contrast, we're not going to be exporting $400 billion worth of massages per year. In addition, globally competing traded sectors like manufacturing are key drivers of local economic growth. As recently explained by "manufacturing romantic" Gene Sperling, current chairman of the National Economic Council: If an auto plant opens up, a Walmart can be expected to follow. But the converse – that a Walmart opening definitely brings an auto plant with it – does not necessarily hold.

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Yet because US traded-sector enterprises in industries like semiconductors, software, machine tools, or automobiles are exposed to global competition, their health cannot be taken for granted. If a traded-sector enterprise such as a semiconductor or automobile manufacturer or software company closes, the business that takes its place may well be located in another country. And if a country loses traded sectors such as the computer chip industry to foreign competitors, that value disappears as the industry's supply chains and industrial commons are hollowed out; the neoclassical assumption that residual assets (i.e., workers) will get redeployed to other high-value-added sectors is generally not the case. Most likely, many of the laid off computer chip workers will end up working in lower-paying sectors (in fact, according to the Bureau of Labor Statistics, employees who move from manufacturing to the service sector take a pay cut of more than 20 percent on average).4 In other words, economies can't thrive on the strength of their non-traded sectors alone, as just about every country in the world but the United States understands. They can't have a vibrant national economy without a globally competitive traded sector, which is why, as we'll discuss below, dozens of nations have implemented specific strategies to bolster their manufacturing/traded-sector competitiveness.

Notwithstanding manufacturing's critical importance to the US economy, Pielke is correct to note that the prior decade was a very rough one for American manufacturing, with the United States losing 5.7 million (32 percent) of its manufacturing jobs. In fact, US manufacturing job loss (as a share of employment) was worse in the last decade than it was during the Great Depression.

Like most observers, Pielke ascribes this decline in US manufacturing jobs largely to productivity gains. But manufacturing productivity grew at roughly the same rate in the 1990s (53 percent) as it did in the 2000s (66 percent), yet in the former decade the United States lost just 2 percent of its manufacturing jobs, whereas in the latter decade, one-third of US manufacturing jobs were lost. So if loss of manufacturing jobs from productivity gains (while real) is not the primary culprit, something else is. And that something else is absolute declines in US manufacturing output, itself a reflection of faltering US manufacturing competitiveness. In fact, during the last decade, 13 of the 19 aggregate-level US manufacturing sectors experienced absolute declines in real output.

Still worse is the fact that US government statistics have significantly overstated the change in US manufacturing output (and, by definition, productivity), partly because of massive overestimation of output growth in the computer and electronics sector and because of problems with how manufacturingimports are measured, as ITIF explains in Worse than the Great Recession: What Experts Are Missing About American Manufacturing Decline. When measured properly, US manufacturing output actually fell 11 percent over the last decade (during a time when GDP increased by 17 percent).

Thus, the conventional wisdom that US manufacturing job loss is simply a result of productivity-driven restructuring (akin to the way that US agriculture lost jobs but is still healthy) is fundamentally flawed. US manufacturing lost jobs because manufacturing lost output. And it lost output because its ability to compete in global markets – some manipulated by egregious foreign mercantilist policies, others supported by better national competiveness policies than ours, including much lower corporate tax rates – declined significantly.

Nevertheless, Pielke attempts to allay concern over US manufacturing losses by arguing (much like former Obama National Economic Council Chair Larry Summers) that manufacturing is declining as a share of employment and as a share of GDP in virtually all industrialized countries, and therefore these trends shouldn't particularly concern US policy makers. But these arguments aren't entirely accurate and, to the extent that they are, they mask the fact that US manufacturing employment and output losses are far worse than those experienced by peer industrialized countries – many of which are actually getting their manufacturing policy right.

Compare the United States to Germany. Pielke asserts that Germany, like the United States, has lost manufacturing jobs. But, whereas Germany lost just 7.5 percent of its manufacturing workforce (when adjusted for changes in working-age population) from 1997 to 2010, the United States lost 42 percent.5 In fact, of 10 industrialized countries tracked by the US Bureau of Labor Statistics, no country lost a greater share of its manufacturing jobs in this interval than the United States did. Meanwhile, Germany manages to pay its manufacturing workforce 40 percent more per labor hour than the United States does. Germany can do this in part because it has migrated up the value chain to higher value-added, higher technological-intensity manufacturing activities: 58 percent of German manufacturing occurs in medium-high- or high-tech industries, compared to just 42 percent of American manufacturing.

Germany has also managed to maintain stable levels of manufacturing output: Germany's share of world manufacturing output held stable from 1970 to 2010, even as the US share declined from 28.6 to 17.9 percent during that period6 (this reveals more about the real global competitiveness of a country's manufacturing sectors than pointing out that, in nominal terms, manufacturing as a share of GDP in countries like the United States, Canada, Germany, and Japan has fallen by about half since 1970). Moreover, in contrast to the "manufacturing is in decline everywhere" argument, manufacturing has held steady as a share of Germany's economy over the past decade – as is the case in Austria, the Netherlands, and Norway – while other industrialized economies have seen their manufacturing sectors grow as a share of their economy: by 5 percent in Switzerland, 13 percent in Finland, 39 percent in Korea, and 68 percent in the Slovak Republic.7

In short, over the past decade in particular, American manufacturing has performed palpably worse than many of its major peer competitors. This loss of US manufacturing is not due to some inexorable shift to a post-industrial economy; it is due to a failure of US policies.

Finally, as US unemployment stagnates stubbornly above 8 percent, it remains puzzling that many analysts haven't connected this to manufacturing job losses. If, from 2000 to 2010, US manufacturing output had grown at the same rate as that of the rest of the business sector, the United States would have 3.8 million more manufacturing jobs today and at least another 4 to 6 million jobs from the multiplier effect, largely filling the persistent employment gap the United States is experiencing (and yes, Germany's unemployment rate actually decreased during the Great Recession).

In conclusion, if we're to seriously address these challenges, we need to abandon what is in fact the neoclassical romanticist myth that "all sectors are created equal" and do exactly what most countries have done: recognize their manufacturing sectors as distinctive and implement comprehensive, coherent strategies to bolster their competitiveness, just as Germany (The High-Tech Strategy of Germany), the United Kingdom (The Government's Manufacturing Strategy), India (The National Strategy for Manufacturing), Australia (Australian Manufacturing: Today and Tomorrow), and many others have done already. Such a strategy doesn't mean a government takeover of the private sector, nor does it even represent a heavy-handed industrial policy that picks "national champion" firms and industries. Rather, it represents a game plan for how to compete and win that points the way for the United States to understand what it needs to do – whether it's cutting theeffective corporate tax rate, reducing regulatory red tape, expanding research funding, facilitating the commercialization of scientific discoveries, better supporting the productivity of its SME manufacturers, etc. – in order to help its manufacturing (and other traded) sectors become more productive and innovative.

It's what the US has to do in order to have a robust, high-tech, high-value-added economy that will support high levels of good-paying employment going forward.

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The author, Stephen Ezell, is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on international information technology competitiveness and national innovation policies.

References:

1. Executive Office of the President, National Science and Technology Council, A National Strategic Plan for Advanced Manufacturing, February 2012, 4; for a discussion of employment multipliers from manufacturing jobs, see: Stephen J. Ezell and Robert D. Atkinson, The Case for a National Manufacturing Strategy, 13.

2. Executive Office of the President, National Science and Technology Council, A National Strategic Plan for Advanced Manufacturing, February 2012, 4; Mark Boroush, "NSF Releases New Statistics on Business Innovation," National Science Foundation, October 2010, http://www.nsf.gov/statistics/infbrief/nsf11300/nsf11300.pdf.

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